Overview

Payroll processing services take payroll off your plate. They calculate gross-to-net pay, pay employees, deposit and file payroll taxes, and produce year-end forms. The work is backed by software, specialists, and clear SLAs.

This guide shows you what’s included. You’ll learn how costs and compliance really work, what to demand from vendors on security and support, and how to implement a new provider with a 30‑60‑90 day plan.

In contrast to software-only tools, full-service payroll providers assume operational responsibility for tax deposits and filings. They manage edge cases like amended returns and garnishments, and support integrations with accounting and HR systems.

If you’re growing, paying in multiple states, or facing industry-specific requirements, the right partner reduces risk and time-to-close payroll. It also improves employee trust. Use this article to estimate TCO, build your evaluation checklist, and prepare your migration.

What are payroll processing services and how are they different from payroll software?

Payroll processing services are outsourced payroll solutions that run payroll end-to-end. They calculate taxes, fund net pay, file and deposit payroll taxes, and issue W‑2s/1099s, while providing support and SLAs.

Payroll software gives you tools to do those tasks yourself. Services do the work for you and take filing responsibility.

Unlike a Professional Employer Organization (PEO), which becomes a co-employer and bundles benefits and HR under its Employer Identification Number (EIN), standalone payroll services keep you as the employer of record. They handle payroll operations.

Many services also manage multi-state payroll, new-hire reporting, and year-end corrections, which software alone may not cover. If you want control without co-employment, but don’t want the burden of filings and deposits, choose a payroll processing service over software-only tools.

In-house vs outsourced payroll: a decision framework

The simplest way to decide is to weigh risk, complexity, and control against cost and capacity. In-house works for low complexity and strong internal expertise. Outsourced payroll shines when compliance and scale increase.

A basic TCO model should include direct fees plus internal labor (setup, each run, exceptions, year-end), error rates, and penalty risk.

Use these criteria:

As complexity rises (e.g., two or more states, recurring garnishments, or government contracts), outsourcing typically lowers net risk and cost. Start with a three-scenario TCO (in-house, software-only, and full-service) over a 12–24 month horizon. Then test assumptions with two reference calls per vendor.

How much do payroll processing services cost per employee per month?

Most payroll processing services charge a monthly base fee plus a per-employee charge, with add-ons for filings, garnishments, and integrations. Typical ranges include base $30–$70 per month and $6–$15 per employee per month (PEPM), plus one-time implementation fees for mid-market setups. Year-end W‑2/1099 forms often run $4–$12 each.

Expect these line items:

TCO example: A 40-employee firm paying $50 base + $10 PEPM spends ~$450/month for core payroll. Add $160 for time tracking, $120 for year-end forms (averaged monthly), and ~$40 in garnishment fees. You land near $770/month, before internal time savings.

Always request a written fee schedule, year-end pricing, and an exceptions matrix (retro pay, off-cycles, amendments) to surface hidden costs.

The end-to-end payroll workflow: roles, controls, and SLAs

A reliable payroll operation is a controlled workflow with clear roles. You own data quality and approvals. Your provider owns gross-to-net accuracy, tax deposits, and timely filings.

The best payroll services define SLAs for cutoff times, funding timelines, support responses, and error resolution.

Controls to insist on include dual approval for payroll, role-based access, change logs for rates and bank details, and hard cutoffs for bank files. Your provider should commit to on-time filing and deposit SLAs, document incident response, and publish uptime targets.

Internally, assign a payroll owner, a backup approver, and a finance reviewer for general ledger (GL) reconciliation and cash funding.

Core cycle: data capture, gross-to-net, funding, and distribution

The core payroll cycle translates time and pay rules into accurate net pay and compliant tax filings. A typical sequence:

Ask vendors for cutoff times (e.g., 2–3 business days before payday), funding lead times, and confirmation artifacts (ACH confirmations, filing receipts).

Exceptions: retro pay, off-cycle runs, voids, and reissues

Exceptions drive labor and risk, so document how your provider handles them, how fast, and at what cost. Common scenarios include:

Insist on a written exceptions playbook with SLAs (e.g., off-cycle cutoffs, same-day rush fees, void/reissue timelines). Confirm how the provider updates tax filings when exceptions affect prior periods.

Security, privacy, and continuity: what good looks like

Payroll data is some of your most sensitive information, so your provider should meet recognized security standards and prove resilience. At minimum, look for SOC 2 Type II attestation (AICPA SOC 2 overview) and an ISO/IEC 27001‑aligned information security management system (ISMS) (ISO/IEC 27001).

You should also expect strong encryption in transit and at rest, granular access controls, and immutable audit logs.

Expect a clear security package. It should cover vulnerability management and patching cadence, pen-test frequency, vendor risk management, single sign-on (SSO)/multi-factor authentication (MFA) options, and offboarding controls.

Continuity specifics should include uptime SLAs (e.g., 99.9%+), disaster recovery objectives—recovery time objective (RTO) and recovery point objective (RPO)—redundant payment rails, and a tested incident response plan. For privacy, confirm data retention and deletion schedules, evidence of least-privilege access, and data residency if applicable.

Ask vendors for:

Advanced compliance: multi-state reciprocity, locality taxes, and SUI/SUTA setup

Running multi-state payroll requires correct state registrations, SUI/SUTA accounts, and awareness of reciprocity agreements and locality taxes. Reciprocity agreements let residents of certain states avoid nonresident withholding in neighboring states, with the right form on file. Locality taxes may apply based on home or work location.

Before paying in a new state, register for withholding, SUI/SUTA, and new-hire reporting, and confirm wage bases and SUI rates. Local taxes often hinge on situs rules—where work is performed or where the employee lives—so your provider must support address-based tax determination.

Document who completes state registrations (you or the provider), how SUI rates are updated, and how locality changes are detected and applied. When in doubt, consult federal guidance like IRS Publication 15 (Employer’s Tax Guide) and verify state-specific rules directly with state agencies.

Garnishments, child support, and other involuntary deductions

Payroll services can administer wage garnishments, child support, and tax levies, but you should understand limits, fees, and remittance expectations. Under federal law, the Consumer Credit Protection Act caps most garnishments at the lesser of 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage. Some states are more protective (DOL wage garnishment limits).

Provide your vendor with the original order, employee details, and priority rules when multiple orders exist. Confirm setup and remittance fees, how changes or suspensions are handled, and how arrears and employer administrative fees are supported (where allowed). Ask for a documented workflow, standard turnaround times from receipt to first withholding, and integration with state disbursement units for child support.

Year-end and amended filings: W‑2c, 1099‑NEC/1096, 940/941/944 corrections

Your payroll provider should generate and file W‑2s/1099s, deliver employee copies, and support corrections when errors surface. The IRS deadline to furnish W‑2s to employees and to file with SSA is generally January 31. Form 1099‑NEC is also due to recipients and the IRS by January 31 (IRS deadlines for Forms W‑2/W‑3; IRS instructions for Forms 1099).

Corrections follow with W‑2c for wage/tax changes and an amended 1096/1099‑NEC when contractor payments were reported incorrectly. Employer federal returns (Form 941/944 quarterly, 940 annual) can be corrected with 941‑X/944‑X/940 amendments. Expect provider fees and defined timelines.

Capture year-end readiness early: validate employee names/SSNs, update addresses, reconcile taxable fringe benefits, and close out third-party sick pay, imputed income, and retirement plan boxes.

Implementation playbook: 30‑60‑90 day migration plan

A disciplined migration minimizes disruption. Spend 30 days preparing data and decisions, 60 days building and testing, and 90 days optimizing once you cut over. For midyear transitions, parallel runs are the best insurance against defects and tax carry-forward issues.

Build decisions into your change management plan: who approves what, how changes are requested, and how pay discrepancies are communicated to employees. Schedule a 90-day post-mortem to lock in process improvements.

Readiness checklist and data migration essentials

Switching providers midyear succeeds when your data is clean, complete, and reconciled. Gather these items before configuration:

Integrations and GL mapping: QuickBooks, Xero, NetSuite, and Sage

Accurate general ledger (GL) mapping translates each payroll run into balanced, auditable entries. This applies whether you sync into QuickBooks, Xero, NetSuite, or Sage.

Define your chart of accounts for gross wages by department or location, employer taxes (FICA, FUTA, SUTA), employee deductions (401(k), HSA), employer benefits (health, 401(k) match), and payroll liabilities and clearing accounts.

A practical mapping approach:

Validate each run with a three-way check. Net pay and taxes funded should match bank debits. Payroll register totals should equal the GL journal. Liability accounts should clear as filings post.

For advanced systems, ask about open APIs and webhooks to automate approvals and posting.

Industry-specific needs: restaurants, construction, healthcare, nonprofits, and unions

Some industries carry unique payroll rules that your provider must support out of the box. Restaurants require accurate tip reporting, tip credit calculations, and allocation rules.

Construction firms on public projects must produce certified payroll and comply with prevailing wage and fringe requirements. Healthcare often needs shift differentials and different pay codes for weekend/holiday work.

Nonprofits may allocate payroll across grants and programs with tight reporting needs. Unionized employers must follow collective bargaining agreements (CBAs) for dues, wage progressions, and fringes.

If you’re in government contracting, confirm the provider can generate WH‑347 certified payroll reports and track classifications and fringes (DOL WH‑347 certified payroll). During selection, demo your real scenarios: cash tips, split shifts, union rates, grant allocations, and project-coded prevailing wage.

Global payroll vs international contractor payments vs EOR

Global payroll aggregates in-country payroll engines to pay your foreign employees compliantly in their home countries. International contractor payments handle invoices to independent contractors abroad without creating an employment relationship. Employer of Record (EOR) providers become the legal employer in a country, hiring on your behalf when you lack a local entity.

Choose based on footprint and urgency:

Check how FX and multicurrency are handled (conversion rates, fees, funding timelines) and what employment documents and benefits are included for EOR hires. Keep models distinct—contractor payouts don’t replace the need for compliant employment when direction and control cross the employee threshold.

Payment options beyond direct deposit

Modern payroll services support multiple pay options, each with tradeoffs for cost, speed, and employee access. Direct deposit remains the default, but paycards can serve unbanked employees, earned wage access (EWA) can help cash flow before payday, and paper checks still apply for certain scenarios or jurisdictions.

Consider:

Document your pay options in the handbook. Require direct deposit or paycard enrollment where permitted. Define timelines for rush funding and reissues.

Support and SLAs: channels, response times, and escalation

Payroll is time-sensitive, so demand clear support channels, hours, and response targets. You should also have named contacts for complex cases.

Expect live chat or phone support during business hours (and extended hours on paydays). Define first-response and resolution targets for critical issues, and an escalation path to tax specialists or an account manager.

Ask about tax penalty guarantees. Many providers cover penalties and interest resulting from their filing errors, but not those caused by late or inaccurate data from the employer.

Clarify exclusions in writing, along with commitments for uptime, deposit timing, and amended return turnaround times. For accountability, request quarterly service reviews with metrics on on-time filings, case resolution, and system availability.

Provider evaluation checklist and RFP criteria

A focused RFP keeps vendors honest and makes scoring comparable. Require evidence, not just statements, for security, compliance, and uptime. Use your real data in demos to test accuracy and fit.

Include these criteria:

Score vendors with a weighted rubric (e.g., 25% compliance, 20% security/continuity, 20% TCO, 15% integrations/GL, 10% implementation, 10% support). Run a paid pilot or parallel test if stakes are high.

Benchmarks and KPIs to track

You can’t improve what you don’t measure. Track cost, timeliness, quality, and compliance outcomes for payroll.

Useful benchmarks include cost per payslip, time-to-close payroll, on-time tax filing and deposit rate, penalty incidence, and first-run accuracy.

Measure:

Review KPIs monthly in the first quarter post-implementation, then quarterly. Tie vendor QBRs to these metrics for continuous improvement.

Next steps

Estimate your TCO using current headcount, complexity, and internal hours. Then shortlist 2–3 payroll processing services that meet your compliance and integration needs.

Prepare migration data, define your GL mapping and approval workflows, and plan a 30‑60‑90 rollout with at least one parallel run. Finally, set KPIs and an SLA-backed support model so payroll becomes a quiet, reliable engine—not a fire drill.